Downtown Minneapolis has a glut of nearly obsolete office buildings like the Soo Line Building at S. 5th Street and Marquette Avenue. The property is undergoing conversion and will be known as Soo Line Building City Apartments.

JEFF WHEELER • jeff.wheeler@startribune.com
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Downtown Minneapolis offices find new life as apartments

Article by: Jim Buchta and Janet Moore

Star Tribune staff writers

March 31, 2013 - 5:08 PM

For decades, the stately Soo Line Building — once headquarters to the Soo Line Railroad and U.S. Bank — dominated the Minneapolis skyline. Old age hasn’t been kind to the 98-year-old tower. Taller, sleeker office buildings and changing business needs have rendered its once-bustling offices nearly obsolete.

Still, the Soo Line’s potential wasn’t lost on Jonathan Holtzman. The Michigan apartment developer/owner bought the former grande dame of the Minneapolis skyline last year and plans to convert the structure into more than 250 luxury apartments.

“It’s going to be spectacular,” he said, noting that he’s spending $1.6 million in steel alone to support a rooftop swimming pool and club room with Zen garden and park.

The Soo Line is one of several Twin Cities office buildings being transformed into rental apartments. It’s a trend driven by a unique set of circumstances, including a shift in attitudes toward renting, an abundance of outdated office space, and the need for developers to set themselves apart in a competitive market.

Converting commercial buildings into living space is nothing new, especially in urban areas where warehouse conversions have been happening for decades. Recently, developers have turned their attention to Class B and C office buildings, which tend to be older buildings that lack the amenities of more modern structures.

Recently, Michael Korsh led the effort to transform a small office building on a tree-lined street across from Loring Park into apartments. Because the building, now called 430 Oak Grove, has historic status, an unusual shape and was built for offices, no two floor plans are alike.

StuartCo, the leasing company for the property, said the building has secured renters faster than anticipated because it offers a sense of history that newer buildings can’t.

“There are still all of the luxuries of a new class ‘A’ apartment, but you also get character and uniqueness that is very difficult to imitate,” said Korsh, director of real estate development for Kraus-Anderson Realty Co.

Such projects cater to a growing number of well-heeled renters by choice, who want flexibility and a connection to the amenities of the city. In fact, the homeownership rate in the Twin Cities has fallen dramatically since the housing crash.

That shift coincides with a persistent glut of Class B and C office space in the Twin Cities. The average vacancy rate for Class B office buildings in downtown Minneapolis is about 25 percent, said Jim Montez, senior director, Cushman & Wakefield/NorthMarq.

“A lot of these old office buildings have been languishing and nobody knows what to do with them,” said Mary Bujold of Maxfield Research. “Now that the apartment market is hot, [building owners are] saying, ‘I’ve got this old office building and maybe now I can turn it into apartments.’ ”

While there’s a glut of office space, downtown apartment vacancy rates have averaged about 2 percent, causing office rents to fall while apartment rents have risen.

“With the lack of [office] tenants, owners are looking for different ways to extract revenue from their properties,” Montez said.

For a new office tenant, for example, it can cost $30 to $40 per square foot to ready the space and rehab common areas, Montez said. Conversion to residential costs $80 to $100 per square foot, but state and federal historic tax credits can reduce that cost to roughly $60 per square foot.

“This may make it economically feasible for building owners who may be finding it difficult to attract new office tenants,” he said. “So it may be a better deal in terms of rent revenue going forward if the property is residential.”

The scenario is playing out at the corner of 8th and Hennepin, where construction is expected to begin this week on the conversion of an eight-story office building into 55 apartments called City Place. Like the Soo Line Building, it originally housed a bank but has since been unable to compete with more modern office buildings.

“You would have to invest a lot to lease it as office space,” said Elizabeth Flannery, project partner for Everwood Development. “In the current market, that was too challenging.”

City Place will be renovated using low-income-housing tax credits (in addition to historic tax credits) and will be aimed at low-income downtown workers. Monthly rents for a one-bedroom apartment will average $825.

Such projects wouldn’t be possible without state and federal historic tax credits, which help offset the high cost of adapting an old building to a new use.

Todd Phillips said he’ll apply for about $12 million in such credits to convert the Plymouth Building on Hennepin Avenue in downtown Minneapolis into more than 250 apartments. The vacancy rate in that building, situated in the heart of the central business district, is more than 50 percent, and a restaurant on the main floor recently closed. And like the Soo Line Building, it has big windows, skyway access and a U-shaped footprint that makes it suitable for apartments.

Holtzman has seen it happen in other cities. His company, which owns and manages about 40,000 apartments across the country, has done 15 historic-building conversions, including Randolph Tower in Chicago, a 45-story former office building where an 803-square-foot one-bedroom, one-bathroom apartment goes for $2,255 a month.

“It leased up faster than anything in our history,” Holtzman said.

Montez and others say that while such conversions represent just a fraction of the 2,100 or so apartments that are under construction in downtown, their impact could be huge.

“With more home dwellers there, you have more people in the central business district,” Montez said. “This spurs new kinds of retail, such as grocery stores, plus it makes for a more vibrant environment downtown.”